LONDON/ABU DHABI (Reuters) - Top wheat importer Egypt's decision to increase the price premium paid to its own farmers has given fraudsters a golden opportunity to pass off cheap foreign grain as locally grown and profit at the country's expense.
Traders and a government official admitted that despite efforts to check whether local farmers really grow the grain they sell, the problem of disguising imported wheat to profit from the payments will remain or worsen this year as the rewards grow.
"In reality it happens every year, this year it's happening even more because the spread is bigger (between cheap origins and Egypt's local wheat price)," a trader said.
"It was Ukrainian, some Russian, some Argentine, but mainly Ukrainian this year."
Evidence of the problem comes from the fact that purchases of local grain remain brisk even though a shortage of diesel for farm machinery since the start of the year should, in theory, be holding back local output.
Egypt has bought 1.1 million tonnes of local wheat so far in the 2011/2012 season despite the diesel shortages, the supply ministry said last week.
Local procurement increased in 2011 to 2.6 million tonnes from 2.1 million tonnes a year earlier.
And with Egypt raising the price it pays for local wheat in October to 380 Egyptian pounds per ardeb (140 kg) from 350 pounds during the last season, traders said wheat from several origins may have been imported since to be sold onto the government at a profit of around $100 per tonne.
Wheat purchased by the government is used to make subsidised bread that allows millions to survive on low pay. Egyptians pay as little as 5 piasters (less than one U.S. cent) to buy saucer-sized flat loaves.
Another trader said that the amount of imported grain, for which Egypt would pay the higher local price, could be as much as 700,000 tonnes.
"Egypt usually produces between 2 to 2.3-2.4 million tonnes of wheat," the trader said.
"The last 2-3 years they've been talking about 3 million tonnes so you can kind of tell how much is coming in."
"My own estimate (of foreign wheat sold as local) would be a minimum of 300,000-400,000 tonnes, up to maybe 600,000-700,000 tonnes," the trader said.
A Cairo based trader underlined the inconsistency between large reported local grain purchases and the diesel shortage.
"They (local farmers) would need a lot of diesel to power the machines for harvesting, and when you think of it there have been shortages in the country, where are they going to get all this energy to harvest 2 million tonnes? It doesn't add up," the trader said.
"The origins can be anything ranging from Argentine to Russian, they are all cheaper than the local procurement price."
An official from the Ministry of Supply and Domestic Trade, who asked not to be named, outlined steps being taken against internal smuggling but accepted that it would be difficult to halt.
"Of course I'm expecting there will be smuggling, it's been happening for years and there's no reason why it shouldn't happen this year," the official said.
The ministry official said the government has tried to control questionable claims partly by clamping down on small farmers selling disproportionately large quantities of wheat.
"Now when we come to buy the wheat from the farmers, we require to see documentation to see how much land he owns."
Traders said the profits were split between the importers and farmers along with others in the supply chain.
Egypt is forecast to consume 18.9 million tonnes of wheat in 2011/12, up from 17.7 million tonnes the previous year, according to U.S. Department of Agriculture data.
The North African country, which has one of the highest per capita rates of consumption at about 180 to 200 kg of wheat a year, imports half of its needs.
The General Authority for Supply Commodities (GASC), the state's main grain buyer, is responsible for the majority of Egypt's wheat imports.
GASC is also in charge of procuring wheat from local farmers, starting around April until July. Egyptian wheat is planted in October and November and harvested in April and May.
The country has consistently imported between 10 and 11 million tonnes of wheat for the past three years, according to International Grains Council data.